In Iran, Intense Capital Flight Threatens Economy

June 1, 2018 | Policy Brief

In Iran, Intense Capital Flight Threatens Economy

Iran’s Parliament Research Center, an official arm of the country’s legislature, published a report last week that sheds light on the extent of capital flight from Iran and the causes of the rial’s depreciation. The center’s report underscores just how fragile the Iranian economy has become, even before it reckons with the re-imposition of U.S. sanctions.

According to the report, between March 2016 and March 2018, the value of capital flight reached $59 billion. Whereas an estimated $20 billion left the country from March 2016 to March 2017, there was $39 billion of capital flight from March 2017 to March 2018, including $13 billion in the last three months of the period. The report projects an even higher annual figure for the March 2018-March 2019 period.

The Parliament Research Center also estimates a $16 billion decrease in Iran’s foreign currency reserves from March 2016 to December 2017, compared to a $27.8 billion increase in the previous three years. While Iran’s current account during this period was positive, at around $27 billion, the capital account was negative, at around -$32 billion. This trend shows that Iran does not yet have a problem in exporting its goods and services; it is the capital flight that is causing the decline in the currency reserves.

The center’s report cites several reasons for the substantial rate of capital flight in Iran: the unpredictability of political and economic conditions, the unsupportive environment for capital, the difficulty of doing business, the high risk of investment, and the increasing rate of emigration from Iran.

According to the center, the intensive capital flight over the past two years contributed to a significant depreciation of the rial. Since October 2017, when President Trump decertified the Iran nuclear deal, the rial has lost almost 40 percent of its value. In April, desperate to shore up the currency, the Central Bank of Iran banned the trading of dollars outside a designated channel and announced a unified rate of 42,000 rials per dollar to replace separate official and market rates. The bank also imposed limits on the amount of hard currency Iranians could buy and hold, an effort to prevent them draining the country’s reserves by spending it abroad.

These measures have not been successful. Despite the so-called unified exchange rate of 42,000 rials per dollar, black market trading continues and has seen the rial lose another 10 percent of its value since early April, hitting 65,000 per dollar.

President Trump’s May 8 announcement of the U.S. withdrawal from the nuclear deal exacerbated the factors that led to capital flight and rial depreciation. Large multinational companies are leaving Iran, even though the United States has not yet re-imposed all of its economic sanctions. In particular, oil export sanctions will significantly reduce the inflow of hard currency into Iran’s reserves. Meanwhile, sanctions on the banking sector, including the central bank, will limit Iran’s access to its decreasing currency reserves.

Economic turmoil as well as political grievances continue to drive daily protests and strikes across Iran. This instability may lead to a further decline in foreign direct investment and trade with Iran, while elites may transfer a larger portion of their assets abroad for security. Such developments will only intensify the rate of capital flight.

In a speech that charted the way forward for U.S. policy toward Iran, Secretary of State Mike Pompeo said the U.S. would intensify economic pressure on Iran until the regime faced a clear-cut choice between saving its economy at home or continuing its malign activities abroad. The latest report from the Parliament Research Center suggests that Iran has only a limited ability to resist such pressure. Therefore, this is an opportune moment for the U.S. to increase that pressure as rapidly as possible.

Saeed Ghasseminejad is a research fellow at the Foundation for Defense of Democracies. Follow him on Twitter @SGhasseminejad.

Follow FDD on Twitter @FDD. FDD is a Washington-based, nonpartisan research institute focusing on national security and foreign policy.